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As an investor with long experience in social responsibility, I've learned to focus on studies that are quantitatively robust and that offer actionable advice. I recently reviewed a study on diversity at boards of directors from
, which examined all of the firms in the Fortune 100. Chicago United concluded that:
Companies with diverse boards of directors had an average return on equity of 25%.
Companies with non-diverse boards had an average ROE of 9%.
Now, these are interesting findings, but the real question is: How can I profit from these results? Well, Chicago United highlighted the most diverse and the least diverse companies from its study. The companies with diverse boards of directors were:
Those without diverse boards of directors were:
My advice is simple: Buy the former. Sell the latter. Why? Companies with diverse boards are more likely to be more sensitive to current and future demographic trends. These trends have real and direct business impacts. These companies are flexible, more agile enterprises. Thus, board diversity can be a lead indicator of higher profits and stock prices.
Companies with diverse boards also are less likely to face discrimination lawsuits. I note, however, that both Citigroup and Target have faced allegations of discrimination in their main lines of business: Citi with respect to making loans in minority neighborhoods, and Target with respect to minority hiring and promotion practices.
As with any investing theory, one must be careful here. I'd think hard about selling Goldman, and I have some reservations about UPS.
Goldman appears to have a printing press in the basement of its 85 Broad St. headquarters that churns out currency. And as
contributor Scott Rothbort has noted, Goldman stands to gain from continued strength in M&A and the end of rate hikes from the
. Thus, Goldman may be able to fight demographic trends a little longer.
As for UPS, this company is not without its problems. Yes, fourth-quarter earnings jumped 21% from year-ago levels, as Ben Thomas mentioned on the earnings
yesterday. UPS posted strong volume and pricing trends, and Ben is long the stock. But Ben
note the possibility of a pilot's strike, and troubling increases in pension and health care costs. Both of these are examples where a lack of harmony in the workplace may hurt profits.
So no theory is perfect. Corporate diversity is one variable among many that influence corporate profits and stock-price performance. In the end, the only indicator that matters is stock price, and we only know this after the fact. But board diversity is a useful factor to consider when analyzing companies, and when deciding whether to buy or sell a stock.
At the time of publication, Cunningham had no position in stocks mentioned.
William Michael Cunningham is a Social Investment Advisor. He has extensive experience in both social and community development investing, having developed several community development investments over the past 20 years. Bill is currently the CEO of Creative Investment Research. He served as the Manager of Social Purpose Investing for the Board of Pensions of the Evangelical Lutheran Church in American from October 1999 to March 2002. Bill holds an MA in Economics and an MBA in Finance from the Department of Economics and the Graduate School of Business of the University of Chicago. He earned his BA degree from Howard University in Washington, DC. He is a member of the Social Investment Forum, the CFA Institute and of the Twin Cities Society of Security Analysts. Send